Bears grumble as markets decline
The bears have picked up the scent of the recent decline in equities and are starting to grumble about the potential for a new bear market. Since September, we’ve seen drops of 5%+ for the S&P500; 9%+ for the ASX200; and 9%+ for the Nikkei 225; but we think the bears are getting over excited and September’s drop is unlikely to mark the beginning of a new bear trend.
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Wealth Know How is the online network helping people manage their wealth through financial education. Whether you are looking for simple ways to better manage your cash, or you are after a complete strategy on how to save for retirement, we can help you understand your options. It is important to have a vision for your future, but its knowledge not dreams that will ultimately deliver financial success.
Published on 14 Oct 14
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The bears have picked up the scent of the recent decline in equities and are starting to grumble about the potential for a new bear market. Since September, we’ve seen drops of 5%+ for the S&P500; 9%+ for the ASX200; and 9%+ for the Nikkei 225; but we think the bears are getting over excited and September’s drop is unlikely to mark the beginning of a new bear trend.
Sponsor - Wealth Know How
Wealth Know How is the online network helping people manage their wealth through financial education. Whether you are looking for simple ways to better manage your cash, or you are after a complete strategy on how to save for retirement, we can help you understand your options. It is important to have a vision for your future, but its knowledge not dreams that will ultimately deliver financial success.
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Duration 03:16
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Aussie dollar surprises market
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Markets climb as investors watch US healthcare bill
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The bears highlight three main concerns:
- Equity valuations and margins are much higher than their long-run averages. This increases the risk of a major and enduring correction at some point.
- The possibility of a recession in Europe; and
- Volatility in the bond and FX markets - caused by the expectation for interest rates in the US to begin to rise in 2015 after seven years of zero interest rates.
A commonly accepted definition of a bear market is a peak-to-trough decline in stock prices of at least 20% - over a period of at least two months. We just don’t see this happening. Below are our reasons why.- The risk of recession in US and globally are low
Bear markets typically occur in, and around, recessions. But we can’t see a recession happening in the immediate future particularly given we are in the middle of an entrenched US recovery. We believe the US is likely to enter an expansionary phase for at least 2015 and 2016, despite some (tentative) signs of a slowdown elsewhere in the developed world.
The risk of recession in Europe remains a possibility. We believe continued growth in the rest of the world will keep things afloat and the recent fall in the Euro will also assist in supporting European growth.
We are backing the bulls because:
- Valuations are acceptable
We believe the market is much less overvalued relative to past situations.
- Internationalisation is supporting stability
The increased internationalisation of corporations into low cost locations has provided a structural boost to the profit margins of the companies that dominate indices like the S&P 500, Nikkei 225 and EuroStoxx50. Internationalisation has also helped diversify revenue streams and linked corporate earnings closer to global growth.
- Finally Brent crude will support global growth
Global growth is also being supported by the recent fall in Brent crude, which has slumped to $92 after more than four years of trading between $100 to $120. The decline has raised questions about how OPEC might respond, although their power is limited given there is no shortage of supplies from elsewhere.